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A landmark deal between Europe’s two largest settlement houses to improve collateral and funding flows has broken down less than a year after first being brokered, Financial News has learned.

In July 2013, the two largest international central securities depositories Euroclear and Clearstream agreed to enhance an existing collateral pooling link by the end of 2015, in a deal brokered by trade body the ICMAEuropean Repo Council.

The deal was intended to allow participants in the market for repurchase agreements – where banks swap assets for cash to secure short-term funding needs – easier and faster access to collateral.

However, it emerged during a European Central Bank meeting in June that the two parties would not be ready to proceed by the 2015 deadline, according to people familiar with the talks and documents seen by Financial News.

Godfried De Vidts, chairman of the ICMA European Repo Council, described the breakdown as “terrible”.

Saheed Awan, head of collateral management and securities finance at Euroclear, said the CSD remained in support of “a harmonised, single European market”. However, he added that following a series of workshops since last July, it was decided that any interoperability pact with Clearstream in the tri-party repo market would not likely be ready in time.

According to documents, preparations for the migration to T2S – an impending ECB initiative to harmonise Europe's settlement platforms – delayed the collateral project; a point acknowledged by both Euroclear's Awan and Clearstream.

A spokeswoman for Clearstream added that it was continuing to work "aggressively" with the council and Euroclear to make "significant improvements" on the existing link.

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However, De Vidts said: “The whole market is held to ransom because those two parties are unwilling to work together efficiently.”

Europe currently operates a fragmented market with a number of central securities depositories, or CSDs, holding assets on behalf of banks in the repo markets. This differs from the US, where the DTCC operates as the main depository.

Groups like Euroclear and Clearstream have been working to address the issue via a process known as ‘interoperability’, whereby links are created that allow banks using different CSDs to move assets around faster. The Euroclear and Clearstream agreement was intended to speed up an existing link, or bridge, that had been in place since 1993 to help mobilise collateral.

The need to have easier access to collateral has grown in importance against a wave of new regulations for the over-the-counter derivatives markets, which mandate the use of collateral to back up swaps trades for the first time.

Firms will now have to post high-quality assets, such as government bonds, when first entering into a swap trade, as well as potentially posting further collateral depending on the mark-to-market value of a position.